Generation pwned: for loanowners under 40, 48% are underwater

Pwned. A term originally coined by mistake when the word “owned” was misspelled by a video game programmer. The word has come to symbolize domination of one party over another, and it’s a particularly appropriate term for loanowners who bought a house hoping to “own” it, and instead they find themselves being “pwned” by the house. I first wrote about this phenomenon in 2008:

Generation Y began buying starter homes in earnest during the Great Housing Bubble. Generation X is just now coming into their prime earning years, and many of them bought move-up homes at inflated bubble prices. The Baby Boomers took their equity and bought multiple properties during the bubble. They all have one thing in common: they are all part of Generation Pwned. … Unfortunately, I know several families who this describes. All are overburdened with debt, and they were counting on increasing income and increasing home prices to finance their lifestyles and their family’s future. It isn’t going to turn out well for them.

Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) [later reduced to 31%]… . Most would be better off walking away. Anyone paying 38% of their gross income (that is gross, not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition. Rapid house price appreciation leading to a HELOC dependent lifestyle is not going to happen any time soon — if ever. Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve. They are truly pwned.

Those that participated in the housing bubble (bought late or borrowed much) will end up breaking down into two groups: those that are pwned, and those that lost their houses. The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can’t decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.

Four years later, the reality of being pwned is setting in on the under-40 generation.

NEW YORK (CNNMoney) — … The percentage of borrowers who owed more on their homes than they were worth fell to 30.9% during the second quarter, down from 31.4% three months earlier, according to Zillow. Of the 15 million borrowers who were underwater during the quarter, a disproportionately large number are under the age of 40, said Zillow chief economist, Stan Humphries.

Nearly half, or 48%, of all mortgage borrowers under age 40 are underwater, about twice the rate of borrowers who are older. And that has created a sort of gridlock that could hinder the housing market’s recovery, he said.

An entire generation trapped in their starter homes. This is creating a huge imbalance as the demand for below median homes affordable to first-time buyers is in great demand, but the supply is very low, partly because the generation that should be vacating these properties is trapped there instead.

“We hear about tight inventory in many markets, and it’s clear where this is coming from,” he said. “Negative equity is trapping young people in their homes, preventing them from selling. These homes are like the very starter homes potential first-time homebuyers are seeking.”

Also, hedge funds are buying below median starter homes at auction and holding them as rentals. Since lenders have drastically slowed the rate at which they take on REO, very little foreclosure supply is hitting the MLS as resales.

Underwater homeowners who want to sell their home … will either have pay off their mortgage in full at closing — requiring lots of cash on hand — or undergo a short sale.

Short sales, however, entail getting the bank to forgive the difference between the amount the home is sold for and the amount owed on the loan. If the bank won’t approve it, the sale can’t go through. Even when the bank allows a short sale, the borrower takes a big hit on their credit score — a consequence many are reluctant to take.

That’s the trap. It forces overextended borrowers to hang on when what they really need is debt relief. Many have already strategically defaulted, and many more are considering it. Only rising prices which gives the distant hope of equity will prevent most of these borrowers from giving up and walking away.

Still, many homeowners just don’t want to absorb the loss, said Humphries. They hang onto their homes, hoping prices will rebound enough to put them above water again. That’s been evident in many cities in Florida and California, where underwater borrowers are common and very few homes are for sale.

It’s more than simply being unwilling to sell at a loss. Many of these loanowers are committed squatters who noticed it’s better for them financially to wait and pay nothing rather than sell and have to move and pay rent.

The impact on the underwater generation: All of this could carry long-term ramifications, for both the economy and these under-40 borrowers, said Mark Zandi, chief economist of Moody’s Analytics.

Most of the young homeowners who are underwater bought at the height of the housing market. Now, as they approach middle age, they have nothing to show for their investments.

Houses shouldn’t be viewed as an investment. That’s part of the problem.

An entire generation that made no money on housing means those people who would ordiinarily be selling their house and porting that equity into a larger, more expensive property are not making those move ups. A lack of equity and a lack of personal savings means the move-up market is dead. The only thing supporting prices in these markets is a steadfast commitment from lenders not to foreclose and resell the properties. But how long will that last? What change in government rules or banking policy might spark them to liquidate? By far the riskiest segment of the housing market are those properties priced more than 20% above the conforming limit.

Housing has never been more affordable, and yet home ownership is still falling and more Americans are renting. The supply of homes for sale is down 24 percent from a year ago, according to the National Association of Realtors, but that still doesn’t explain why so few buyers are jumping in. The answer lies in the immobile move-up buyer.

The NAr is keen to tout sales increases over the previous year, not matter how small. What the NAr fails to point out is how low sales volumes are compared to a historically healthy level. Sales continue to languish well below historic norms due to the absence of move-up buyers.

“At current mortgage interest rates, the monthly cost of the typical new mortgage – at about 12 percent of median income – is not much more than half normal levels,” notes Paul Diggle of Capital Economics. “In other words, housing is very affordable.”

He’s right. One of the most surprising results that came from my recent incorporation of long-term affordability data into my monthly reports is how well the beach communities scored. They are still inflated, but they are far less inflated that they ever have been.

Still, while mortgage refinances soar to a two-year high, weekly numbers from the Mortgage Bankers Association show that applications to purchase a home are down by 6 percent over the past year.

I know I have posted this chart a number of times, but it’s worth repeating that demand is still weak despite the anecdotes of buyer frenzies. The appearance of strong demand is an illusion created by very low supply.

“Investors and first-timers have come in and out of the market throughout history at various times for various reason, but underpinning housing has always been move-up/across/down buyers,” says Hanson. “Half of the repeat buyers have died. They are down for the count due to negative equity, “effective” negative equity, low quality credit, or legacy 2nd liens they can’t extinguish. This is a huge problem for anybody betting on ‘escape velocity’ or a ‘durable recovery’ in housing.”

Mark is still delightfully bearish.

The best deals going forward will be on those properties between 20% and 40% above the conforming limit. There are very few potential buyers with the cash and the credit to complete those transactions, and banks are allowing a great deal of squatting at those price points. When this debris is finally cleared out, nicer and nicer properties will sell in this range. For those who can afford what would be traditionally considered a move-up property over the next three to five years, the buyer competition will be low, and the supply will be large.

27 responses to “Generation pwned: for loanowners under 40, 48% are underwater”

The taxpayers lost billions on the AIG bailout, but in typical government fashion, to justify their actions, they announce they saved the world and made a profit. Complete and utter bullshit. If they truly did make a profit from this bailout, wouldn’t the former bondholders and stockholders sue?

The Federal Reserve Bank of New York announced an important milestone Thursday – the final sale of its remaining securities from the 2008 AIG bailout.

The final sales from Maiden Lane III, one of the struggling mortgage-related portfolios the Fed usurped in 2008, brought the Fed’s total profit from AIG securities to $6.6 billion.

“I am pleased that we were able to achieve our principal goal, which was to protect the U.S. economy from the potentially devastating effects of AIG’s failure, while demonstrating sound stewardship of taxpayer interests,’‘ said William Dudley, president of the New York Fed.

“I am proud of and commend all of the people at the New York Fed who worked tirelessly and diligently to get us here,” Dudley stated in a press release Thursday.

The Fed has been shedding its AIG securities since early this year with the sale of its final Maiden Lane II securities in February, followed by sales of some Maiden Lane III securities in June.

Maiden Lane LLC and Maiden Lane III LLC also repaid loans to the Fed in June, with interest.

The Fed profited $8.2 billion in interest and fees from loans made to AIG, in addition to its profits from the sale of Maden Lane securities.

In all, the Fed accrued $17.7 billion in revenue from its assistance to AIG.

The Federal Reserve and the Treasury stepped in to aid AIG, the world’s largest insurance company, in 2008 when the company was teetering on the edge of collapse.

AIG’s collapse “posed a direct threat to millions of policyholders, state and local government agencies, 401(k) participants, banks and other financial institutions in the United States and abroad,” according to the Fed.

Since 1998, it was massive fraud, a ponzi lending scam, excess leverage, regulatory capture and govt central-planning MO that drove home prices-up. Thus, anyone who bought a home in the last 14 years is also a member of generation pwned. Especially those in the bubble counties.

Earlier this week, FHFA, Fannie Mae, and Freddie Mac revealed new short sale guidelines to take effect November 1 of this year.

The new guidelines are expected to make short sales easier to process and will open up the foreclosure alternative to current borrowers with certain hardships.

While Fitch Ratings views these new rules as a plus for the housing market in the long term, the ratings agency said, “in the short term, the new guidelines could increase losses on some existing bank home equity or second lien portfolios.”

The ratings agency made it clear that it believes foreclosure alternatives are good for the market. For lenders, the positives come in the form of not having to deal with the lengthy and costly problems foreclosures bring.

“For example, short sales on non-agency RMBS are currently finishing 20 months after the last payment made on the loan. That is approximately 10 months shorter than the average time to foreclose. Similarly, the loss severity on prime non-agency mortgages is 14% lower on short sales than REO sales,” Fitch stated.

Another important provision from the new guidelines is one which addresses issues with subordinate lien holders. In order to prevent second lien holders from stalling approval, the GSEs will offer lenders up to $6,000.

Fitch noted that over the short term, the impact of this new guideline on lenders will “vary greatly, as the carrying, legal, servicing, and opportunity costs range broadly across many loans.”

The ratings agency also added that “many of the 2005-2008 vintage home equity lines of credit are still in their interest-only stages and likely to begin amortization in 2014-2015, which may further pressure home equity performance over the intermediate term.”

Consumer confidence in the U.S. fell last week to the lowest level since January as Americans’ held more pessimistic views on their finances.

The Bloomberg Consumer Comfort Index decreased to minus 47.4 in the period ended Aug. 19, the sixth consecutive drop, from a minus 44.4 the prior period. The series of declines is the longest since 2008, when the U.S. was in recession.

Higher gasoline prices are taking a bigger chunk out of Americans’ paychecks, and an increase in food prices caused by a drought in parts of the country may further hurt finances. In addition, job growth hasn’t proceeded fast enough to bring the unemployment rate below 8 percent, indicating incomes may fail to keep pace with escalating expenses.

“Rising food and gas prices have stoked a bout of discomfort among a broad section of the American public,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “The pain has been especially evident down the income ladder in households that will bear the disproportionate burden of adjustment to higher prices. The result will likely be a net slowing in discretionary spending.”

Readings below minus 40 put the comfort gauge “in the zone associated with deep economic discontent,” according to Gary Langer, president of New York-based Langer Research Associates, which compiles the index for Bloomberg. The index has lost 16 points since peaking this year in April.

A Labor Department report today showed the number of Americans filing first-time claims for unemployment benefits climbed last week to a one-month high. Jobless claims rose by 4,000 to 372,000 in the period ended Aug. 18.

Stocks fell amid speculation whether central banks will ease monetary policy further and European leaders will be able to solve the region’s debt crisis. The Standard & Poor’s 500 Index dropped 0.4 percent to 1,408.48 at 9:39 a.m. in New York.

QE3 probably means $5/gallon gas. Good luck getting re-elected on that. Can’t do QE3 when the S&P 500 is very close to the yearly highs, but I suspect more years of deficit spending/currency devaluation ahead.

I wonder – does that stat on underwater homeowners take 2nds, 3rds and HELOCs into account or is it just 1st mortgages? Either way it’s an insane number but if it’s higher due to “equity” extraction then that generation is screwed. As a month-to-month renter who doesn’t pay for water, gardening, repairs or maintenance, I can’t imagine how it must feel to be trapped in a home, especially if you’re a growing family or need to find work elsewhere. Friends of mine in this position seem to gravitate towards retail therapy to maintain the wall between fantasy and reality in their minds. They still renovate their homes, lease luxury cars, go on vacations, buy stuff, etc. Anything to make them feel like they’re “living the dream.” Pwned indeed 🙂

It’s not fun. I thought draining our savings to payoff our second taking us “above water” would make me feel slightly better, but it’s been way beyond that so far. It’s like we’ve made the decision; we know the direction we’re heading; and we have a plan. Before it was a waiting game – waiting to see if the banks or government would get us some great deal, or waiting to see if the market would really tank and we’d lose income.

We have very little cash savings right now, yet I haven’t felt this good about our financials in five years.

It’s great that your prudent and conservative money management put you in a position to recover both financially and emotionally. You should feel good. This situation is resolved. You have a new course of action, and you’re following it. What happens to resale values is outside of your control, but you have your freedom and peace of mind again.

I know people who use their brand new Samsung Galaxy S III to locate the payday advance/check cashing place that charges 15% every two weeks! Crazy. We are a debt/desire based economy instead of a income/needs based economy.

Technically I’m part of the underwater generation, but I’m not swimming in it, thankfully. As a renter, I’m only paying a few hundred extra dollars a month in inflated rent costs as to what would likely occur without manipulated markets. I laugh at the approach of how my contemporaries overspend money and somehow think they are going to get ahead in life, assuming there is “sophisticated” debt. It keeps employees working at my business I guess, since they need that next paycheck.

I will never forget the get rich off Real Estate Investing seminar (company will remain nameless for now) I went to in 2005 which encouraged leveraging every RE property you could get into more and more properties and “capture appreciation.” The seminar instructor, himself in my generation– no more than 35 years old at that time, was of course, pitching all of us young naive guys how we would become wealthy beyond our wildest dreams. I politely raised my hand and asked him “But what is the strategy you use if real estate doesn’t appreciate, or even if prices go down?”

You would have thought I asked him if there was a little green alien in the room. Silence. Then… “Um, hahaha, real estate NEVER goes down in price!” It was at that moment when I realized I was smarter than him, and I wouldn’t be owning real estate for a long time. 7 years later now, and my perspective hasn’t had much reason to change.

My wife and I will probably have a lot of straggling friends resurfacing in 20-25 years to spend the holidays with us because their lives have been ruined due to extremely poor and shortsighted decision making…

Debt is great when you don’t have to pay it back. FHA at 3% down, pay the mortgage for a few years, go under water and live rent free for a few years.

Last week there was a fellow that got FC’ed after a short time of non-payment. His mistake was to take a loan far under value. The house price when down. The bank could recover the loan with a FC. If the loan was far in excess of the house price, he, the loan owner would likely to live rent free for years. Living responsible doesn’t pay in these times.

Where’s the supply going to come from? Boomers who sell and give up their Prop 13 benefits? Banks suddenly deciding to foreclose? Underwater owners agreeing to short sales? The organic market seems to be dead and I guess one or more of the above could happen, but I won’t be holding my breath…

I remember one story of a HELOC abusing doctor who used his HELOC to pay off his $250,000 student loan debt. He defaulted on the HELOC and obtained relief. He never would have gotten such relief on the student loan debt.

A MD with a BK can quickly re-establish credit. In the old day a common practice as to declare BK on the last year of residence or law school. Banks were more than happy to give them a home or business loan. President Reagan ended forgiven for student loans due to these abuses. His handling of leveraged buy out is another matter.

As far as the HELOC being used to pay off the student loan, what what many banks were advocating. Now the banks want the taxpayers to bail them out for the borrowers following the bank’s advice? I bet the banks will give another loan to the MD in no time.